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S. Korea cuts key rate for 1st time in 15 months

Youkyung Lee AP Business Writer

Updated:
08/13/2014 11:37:00 PM EDT

SEOUL, South Korea (AP) — South Korea's central bank cut its key interest rate for the first time in 15 months on Thursday, providing support to an economy dragged down by the shock of a ferry sinking that killed hundreds of teenagers.

The Bank of Korea lowered its policy rate by a quarter percentage point to 2.25 percent. The bank had kept it unchanged since a rate cut in May 2013.

Most analysts had predicted the bank would lower borrowing costs to boost consumer sentiment.

The sinking in April of the Sewol ferry killed 294 people and left 10 missing, mostly teenagers on a school trip, causing a national outpouring of grief. Consumer spending shrank in the April-June quarter, hitting its lowest in nearly three years.

In a statement, the central bank said South Korea's exports continued to pick up but recent improvement in consumer spending was "insufficient." Investment by companies was also weak, it said.

Last month, Bank of Korea and the Finance Ministry lowered their growth outlooks for Asia's fourth-largest economy. According to the central bank, South Korea's economy will likely expand 3.8 percent this year instead of 4.0 percent while the finance ministry predicted 3.7 percent growth, revised down from the previous forecast of 3.9 percent.

To encourage spending by consumers and companies, South Korea's new finance minister unveiled last month stimulus plans that included easing mortgage rules to stimulate the housing market. The government also announced a new tax policy to encourage companies to pay more dividends to investors and raise wages.

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Low inflation has given the central bank scope to cut interest rates. It said it would continue to give support to the recovery in coming months.